"Almost any tax cut or spending increase would succeed in boosting a sluggish economy if the Federal Reserve Board follows an accommodative monetary policy. " -- William Gale of the Brookings Institution
Does this mean Bush's tax cuts have fixed the economy and spurred the recovery, that they truly were the needed medicine and sound fiscal policy? well, no:
the bulk of last quarter's growth came from a huge surge in consumer spending, with a further boost from housing. These components of spending stayed strong even when the economy was weak, so there shouldn't have been any pent-up demand. Yet housing grew at a 20 percent rate, while spending on consumer durables (that's stuff like cars and TV sets) � which last year grew three times as fast as the economy � rose at an incredible 27 percent rate last quarter.
This can't go on � in the long run, consumer spending can't outpace the growth in consumer income. Stephen Roach of Morgan Stanley has suggested, plausibly, that much of last quarter's consumer splurge was "borrowed" from the future: consumers took advantage of low-interest financing, cash from home refinancing and tax rebate checks to accelerate purchases they would otherwise have made later. If he's right, we'll see below-normal purchases and slower growth in the months ahead.
The big question, of course, is jobs. Despite all that growth in the third quarter, the number of jobs actually fell. And new claims for unemployment insurance, a leading indicator for the job market, still show no sign of a hiring boom. (By the way, for the last month there's been a peculiar pattern: each week, headlines declare that new claims fell from the previous week; a week later, the past week's number is revised upward, and the apparent decline disappears.)
And unless we start to see serious job growth � by which I mean increases in payroll employment of more than 200,000 a month � consumer spending will eventually slide, and bring growth down with it.
In other words, people had a lot of one-time cash from teh tax cuts. That led to a spike i consumer spending.
Also, interest rates are very very low, since the Fed cut rates so aggressively to combat the stock market being in the toilet. That led to a more mortgage refinancing and new home sales.
But we keep losing jobs. And thats really the main point:
it would be quite a trick to run the biggest budget deficit in the history of the planet, and still end a presidential term with fewer jobs than when you started. And despite yesterday's good news, that's a trick President Bush still seems likely to pull off.